2. How you pay Income Tax

Pay As You Earn (PAYE)

Most people pay Income Tax through PAYE. This is the system your employer or pension provider uses to take Income Tax and National Insurance contributions before they pay your wages or pension. Your tax code tells your employer how much to deduct.

Your tax code can take account of state benefits, so if you owe tax on them (eg the State Pension) it’s usually taken automatically from your other income.

Self Assessment tax returns

If your financial affairs are more complex (eg you’re self-employed or have a high income) you may pay Income Tax and National Insurance through Self Assessment. You’ll need to fill in a tax return every year.

Income Tax on savings and investment interest

Income Tax is usually taken from interest on savings and investments automatically.

Income that’s not automatically taxed

You must fill in a tax return if your untaxed income is over £2,500, or if you don’t pay tax through your wages or pension. You must contact the Income Tax helpline if it’s less than £2,500.